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Nikkei Markets

Malaysia revives China-backed rail project to spur growth

China Exim Bank agrees to lend 85% of project cost, to soon ink funding pact

The ECRL is one among the few big ticket infrastructure projects that Mahathir has sought to revive to perk up activities in a trade-reliant economy amid mounting external uncertainties and sluggish domestic demand.   © Reuters

KUALA LUMPUR (Nikkei Markets) -- Malaysia Thursday relaunched a $11 billion China-backed rail project after slashing the construction cost by a third, which is expected to rev up activities in a slowing economy and reduce interest liability of the government hobbling under massive debt.

Malaysia is hoping the revival of East Coast Rail Link or ECRL will not only benefit the construction sector - a key component of its economic output - but also boost the logistics segment.

"Shipping and logistics industries will certainly enjoy encouraging growth," Transport Minister Anthony Loke said at the project relaunch event.

The project, led by China Communications Construction Co. and Malaysia Rail Link Sdn Bhd was initially aimed at linking eastern Malaysian states of Kelantan, Terengganu and Pahang with Kuala Lumpur. It was suspended in August 2018 following a government review that showed the estimated earnings won't be sufficient to cover the annual operating expenditure of the rail link.

Cost of the project, initially billed at $16 billion, swelled as construction started, sparking worries that total cost could top $19 billion. Prime Minister Mahathir Mohamad, who swept to power in a shocking May 2018 election outcome, scrapped or suspended several infrastructure projects citing such costly efforts offer little economic gains. He has alleged that initial cost of ECRL was inflated and could have been lower if it was offered through open tender. However, the government revived talks later and in April agreed with China to restart the project at a reduced cost of 44 billion ringgit ($10.68 billion).

The ECRL is one among the few big ticket infrastructure projects that Mahathir has sought to revive to perk up activities in a trade-reliant economy amid mounting external uncertainties and sluggish domestic demand. Steep cuts in public spending have dented consumption in Southeast Asia's third-largest economy, spurring economists to call out for measures to boost domestic demand, in part by pressing ahead with large infrastructure development initiatives to cushion the impact from slowing exports growth.

The ECRL will strengthen collaboration between Malaysia and China as the project plan includes building industrial parks as well as transit-oriented development along the railway track, Loke said.

Meanwhile, Malaysia Rail Link, the asset owner of ECRL will sign a supplementary pact on funding the project with China Export-Import Bank in the "near term", Loke said.

Both parties have concluded re-negotiation over funding for ECRL, under which China Export-Import Bank will lend 85% of the total project cost.

"The smaller loan amount is in line with government's effort to reduce the project cost," Loke said. This will lower the government's interest liability, he added.

The 640-km network is expected to be completed by December 2026.

Bids have been sought for project contracts and orders will be awarded as the work progresses in stages, Loke said. "Local contractors that have been registered will have the opportunity to participate in station and depot building," he said.

--Gho Chee Yuan

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